Yes I'm sure, I took the # off the list in the driver's cfg file so that it can read other music. I open FF7Music and click play. It in fact made not only the music in-game muted, but sound effects/other things that require sound on Windows as well. I had to go back in game for the music to start again and quit...
That is very odd indeed. It seems like FF7Music is stealing the audio driver from Windows so the game can't use it, but failing to play music. What sound device are ff7music and ff7config set to? I strongly recommend using "Microsoft Sound Mapper" if it's available rather than naming the card itself, as it could potentially try to take complete control of your sound card, but MS Sound Mapper is a little better at sharing.
I'm using XP. I will say that I didn't use your installer because I was too lazy after downloading many things that day. It's still the latest version of FF7Music 1.5.1, so there can't be much of a difference...
In some ways, the installer is exactly the same. It's the same songs, the same application. However, it handles a lot of settings for the user (which is particularly necessary on Vista/7 since ff7music doesn't like to play nice on those, but less of a problem on XP), makes sure things are put in the right directories, and generally prevents a lot of common issues. Your issue, however, seems to be an odd one, and I doubt using the installer would help with it (though don't be afraid to give it a try).